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Slowing gun sales wounding stock prices of U.S. firearms makers

Gun sales are slower than usual this year, and backlash following the 2012 shootings at Sandy Hook Elementary School caused some high-profile U.S. pension funds to pull their money from firearm manufacturing companies

The cash register is a little quiet lately at Frontier Firearms in Kingston, Tenn., but the shooting range is still hopping.

Gun sales are always slow in the summer, but they’ve been even slower than usual this year. People rushed to buy assault rifles following the December 2012 school shootings at Sandy Hook Elementary School in Newtown, Conn., thinking they were about to be banned, but the highly charged incident also caused some high-profile U.S. pension funds to pull their money from the companies, with the result that sales have since dropped off.

That’s bad news for firearms manufacturers such as Smith & Wesson Holding Corp. and its shareholders, including the Royal Bank of Canada and the Canada Pension Plan Investment Board. Smith & Wesson’s Nasdaq-traded shares fell 13.63% to close at US$11.31 Wednesday after it cut its revenue and earnings forecasts for the year on Tuesday, with competitor Sturm Ruger & Co.’s share price tumbling 3.49% along with it to US$49.25.

Frontier Firearms general manager Eric Parish said he’s not worried. If the shooting range is busy and people are signing up for classes, that means they own guns — they just happen to have all they need right now.

“It recovers,” Mr. Parish said. “You’ll have your scare where people start trying to grab up whatever, then it’ll dip back down, then it’ll level back out.”

Mr. Parish said customers have been stocking up on firearms since 2008, when U.S. President Barack Obama was elected. People passionate about their Second Amendment right to bear arms wanted to buy them before their rights got taken away, he said.

Those fears have turned out to be exaggerated, as were predictions the Sandy Hook shootings would lead to sweeping new gun control legislation. One lasting effect the mass shooting did have, however, was to turn some investors off the sector completely.

The California State Teachers’ Retirement System, known as Calstrs, has US$186-billion in assets under management — and firearms manufacturers aren’t getting any of it, except for some funds in a private equity investment the pension plan is in the process of divesting. Calstrs spokesman Michael Sicilia said after Sandy Hook the organization decided to stop investing in companies that manufacture firearms that can’t be legally purchased in California.

“Sandy Hook was a horrible tragedy that affected schoolchildren,” Mr. Sicilia said. “We’re the largest educator-only pension fund in the world. There was consensus that that was not something that we wanted in our portfolio.”

Smith & Wesson still counts some big Canadian names among its investors. The Royal Bank is the company’s fourth-largest shareholder with a 4.58% stake and CPPIB holds 0.11% of the company’s shares.

A spokeswoman for RBC declined to comment, citing a compliance policy against commenting on specific securities held in the bank’s portfolios. Linda Sims, a spokeswoman for the CPPIB, said the pension plan holds shares of Smith & Wesson in its passive portfolio, which is meant to mirror global indices.

Dougherty & Co. LLC analyst Andrea James, who covers Smith & Wesson and Sturm Ruger, said the industry is a politically charged one prone to regulatory changes. However, she said the industry’s long-term prospects are promising for investors.

“We’ve seen a lot of women getting into the sport, and we’ve seen an increase in interest in carrying a firearm concealed,” she said in an email. “Are consumers buying more guns than last year? No, they are not. Are consumers buying more guns than three years ago? Yes, they still are.”

In announcing the company’s earnings, Smith & Wesson president and CEO James Debney said he expects demand to pick up again this year.

“We believe that the current environment reflects high inventories industry-wide,” Mr. Debney said. “We expect the industry will continue to deliver growth over the long term.”

Mr. Parish said Frontier Firearms is one of those gun shops with high inventories right now, with slow sales giving him little reason to buy more from manufacturers.

Things are quiet following years of news stories prompting customers to stockpile ahead of stricter regulations that never came, he said.

“I think people just bought so much during those times that pretty much everybody has what they need,” he said. “People are just tapped out.”